A Skeptical View of China Internet ETFs

ETF Trends

U.S. Internet stocks have made 2013 seem like it is 1999 all over again, but not to be left behind are the Chinese equivalents.

Among the top-10 non-leveraged ETFs with less than $100 million in assets under management this year are the Guggenheim China Technology ETF (CQQQ) and the Global X NASDAQ China Technology ETF (QQQC). [Small Sector ETFs With Big Returns]

The KraneShares CSI China Internet ETF (KWEB), a more focused Internet play, also merits a place in the conversation as that ETF has jumped more than 19% since its August 1 debut. All of these funds have benefited from fundamental factors such as China’s rising middle class, increased urbanization there and the ascent of China as the world’s largest Internet market.[KraneShares: China ETFs With a Twist]

There are more Internet users in China than there are people in the U.S., but Internet penetration in China is still low relative to developed markets.  Still, some market observers have a skeptical view of China Internet ETFs.

“…W hile it may be true (there are powerful demographic forces driving Chinese Internet usage), it’s nothing more than information. It’s not value-relevant information. The takeaway is that information doesn’t have any value unless you’re the only one who knows it or you can somehow interpret it better than your competitors,” writes Larry Swedroe on CBS MoneyWatch.

Said another way, if everyone and his sister know there are lots of Internet users in China, that does not necessarily Chinese Internet stocks are locks to move higher.

Swedroe goes on to note that despite China’s economic growth rates, the very ones that are far higher than what is seen throughout the developed world, China ETFs are not guaranteed to rise. Over the past three years, the iShares China Large-Cap ETF (FXI) , the largest China ETF by assets, has lost 14%. [ETFs for a China Rebound]

Still, comparing large-cap China ETFs to their Internet peers is not apples-to-apples. FXI, as just one example, holds just 26 stocks and is dominated by state-run firms, banks in particular. The financial services sector, one of the most loathed corners of Chinese equity markets over the past year, is 55.4% of FXI’s weight.

FXI and comparable China funds offer little leverage to the consumer/Internet story that investors prize and one they have been willing to assign high multiples to.

Even with that, Chinese Internet stocks are not as richly valued as their U.S. peers. CQQQ has a P/E ratio of 15.5, which is below the 18.6 found on the PowerShares QQQ (QQQ) .

Guggenheim China Technology ETF

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Tom Lydon’s clients own shares of QQQ.

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